The region experienced decisive additions to oil and gas capacity in 2018, with soaring natural gas production in the Marcellus and Utica basins outpacing the infrastructure required to move it to market

Electric vehicles are either a fad or a big problem for the oil industry, depending on who you speak to. But the sector should beware of complacency

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For an industry still relying on people pouring its flammable product into a contraption that sets off a series of tiny explosions to propel a tonne of metal along a road—an ingenious mobility technology that is already more than a century old—the oil sector has been pretty relaxed about the threat of electric vehicles (EVs).

Or that's its public face, anyway. At most industry conferences, oil executives will be heard poking fun at EVs' tiny share of the car market. Inevitably, they'll follow this with projections showing that the internal-combustion engine (ICE) will remain king for decades to come, even if do-gooder eco-warriors spend their savings on Nissan Leafs.

But as the current oil price shows, things change-and quickly. It doesn't take much of an oil surplus to have a big impact on the market. So is the industry right not to be too worried about Tesla and its like too?

For now, at least, the oil boosters are right. The EV market is so small as to be an irrelevance in terms of how it affects oil demand. The 2m or so plug-in EVs forecast to be on the world's roads by the end of this year comprise a tiny fraction of the total global fleet of 1 trillion or so cars. And given the passenger-car market only accounts for around 18% of total global oil demand of almost 97m barrels a day, EVs displace a negligible volume.

Many of those prepared to predict long-term EV growth think market share, while much larger than today, will still be relatively small-perhaps in the 50m-100m range by 2040-50. That's hardly earth shattering. Even the snappily titled Paris Declaration on Electro-Mobility and Climate Change and Call to Action, which came out of the last global climate change conference, sets a modest global deployment target of 100m electric cars (and 400m electric two- and three-wheelers) in 2030. That's much more than today, but still in rounding-error territory compared with a global car fleet that can also be expected to expand in the meantime.

Electric orchestra

It's figures like these that keep oil executives sleeping peacefully at night. ExxonMobil's chief executive Rex Tillerson—oil booster supreme—is in no doubt. The shortcomings of EVs compared to ICE vehicles make them a tough sell for consumers, he reckons. Last year, he described their task as "daunting". Ryan Lance, ConocoPhillips's boss reckons EVs won't have a significant impact on the oil industry for 50 years.

Ben Van Beurden, Shell's head, thinks that, while EVs will become increasingly popular, the overall growth in global energy demand will outstrip any displacement of oil sales caused. That chimes with the International Energy Agency's (IEA) mid-range scenario in its last World Energy Outlook: world oil demand would be somewhat higher in 2040 than now (103.5m b/d in 2040, versus 90.6m b/d in 2014), despite efforts to curtail its use. The figure for oil demand from transport was also seen as growing marginally, despite greater use of EVs.

Yet, behind those statistics is a great deal of uncertainty. A consensus about EV growth, and its impact on the oil market, simply doesn't exist.

"EV penetration will slow oil-demand growth," says Alan Gelder, an oil-marketing analyst at consultancy Wood Mackenzie. "The question is the pace." In the transportation segment, oil demand is already declining in OECD countries, he points out, while growing in emerging markets. "That could mean that EV uptake in the developing world will reduce oil-demand growth there, while in Europe and the US it could well tip oil demand into decline."

Earlier this year, a Bloomberg New Energy Finance (BNEF) study concluded that-assuming the oil price recovers to trade in the $50-$70-a-barrel range-EVs should become a more economic option than gasoline-fuelled cars during the 2020s. By 2040, it predicted, EVs would account for 35% of new light-duty-vehicle sales. 400m EVs would be on the road, amounting to roughly a quarter of the world light-duty-vehicle fleet.

The impact on oil demand? Large, according to BNEF. Those 400m EVs would displace 13m b/d that would otherwise be burnt in ICE cars by 2040-more than Saudi Arabia's total production. Even by 2028, it predicts, EVs would displace 2m b/d.

That sounds apocalyptic for oil prices. Consider that, for example, the drop in prices since 2014 has been caused by an overhang of supply that has been around 1.5m b/d at its peak.

But it isn't as simple as that. If forecasts from the likes of the IEA are accurate, overall oil demand will be growing at a rate that could more than offset declines brought by greater EV use. That includes rising consumption from gasoline and diesel-fuelled transport, such as heavy-duty, long-haul vehicles-for which battery power is presently unsuitable.

As for the upstream, its imperatives are different too. Exploration and production companies will have plenty of projects they need to invest in over the next 20 years just to find enough fresh supply to compensate for maturing fields. So even if EVs start clogging the roads, oil companies will still need to keep drilling.

Also, not everyone takes the BNEF view, which assumes high sales growth and high mileage by EV drivers. Wood Mackenzie's Gelder notes that some forecasters think there will be only 50m EVs on the road by 2040-a conservative view shared by ExxonMobil. If so, the displacement would amount to well under 1m b/d of oil demand, depending on the mileage being covered by EVs and the extent to which gasoline/electric hybrids remain part of the mix.

Still, as a proxy for demand-side tech in general, EVs should make oil firms think hard as they make longer-term investment plans. The uncertainty surrounding the forecasts for EVs should not mean complacency.

Some see a corollary in the pick-up of mobile phones. They started as a niche luxury but within a generation had conquered the mainstream, leading the supportive infrastructure rushing to keep up-and landline advocates looking foolish. (Yes, say oil's fans. But a mobile phone costs a couple of hundred dollars; a car is often the second-biggest purchase a consumer might make, after her house.)

An umbrella in a thunderstorm

What we do know is that EV demand is sky-rocketing right now, albeit from a low base. In the first half of 2016, global EV sales grew by 49% compared with the first half of 2015 to reach 312,000, according to Swedish-based consultancy EV Volumes. It forecasts total sales of around 0.85m for 2016 as a whole.

Impetus in the early years of EV development came from the US, Europe and Japan. The charge is now being led by China, where government investment, subsidies and the sheer size and rate of expansion of the transport market is driving the growth. Other Asian markets, such as India, should feed into this.

If the mobile phone example isn't compelling, try ICE itself. The Model T Ford's penetration began with similarly lofty rates of uptake-even while the car was being ridiculed against the more reliable and familiar horse-drawn vehicles. Or look at gasoline's swift replacement by diesel in long-distance heavy vehicles in the US in the 1950s. A more recent example is the rapid development and falling costs of solar energy.

Tony Seba, a Stanford University lecturer and writer on the disruptive effect of clean-energy technologies, has created waves with his prediction that the electrification of the transport sector will happen—in energy terms-almost overnight. He thinks that by 2025 all new cars sold globally will be electric.

Consumers, though, are picky. Those transport technologies had obvious advantages for people needing to move from A to B: the car was faster and more convenient, with a longer range, than the horse. Diesel was cheaper and better for long distances than gasoline. EVs, by contrast, won't take passengers as far and, without subsidies-and often even with subsidies-remain expensive. Who wants to pay more to suffer range anxiety?

What you do get with an EV is a quieter car and much lower year-on-year maintenance costs-around half those of a gasoline-powered vehicle, by some estimates. These lower running costs stem from having simpler on-board technology than a modern ICE, which requires a bevy of complex additional components to meet environmental requirements, reduce engine vibration, ensure reliability and so on. And, of course, an EV user gets to do their bit to reduce harmful gas emissions and particulates from the vehicle and-if the power to charge the battery comes from renewables-to reduce greenhouse gas emissions from the power sector.

It's a trade-off that EVs demand. For all EVs' gadgetry, green credentials and tech-appeal, most drivers will still pick up a cheap ICE vehicle from a deep second-hand market (which doesn't really exist yet for EVs).

Moreover, subsidies and other perks-like being allowed to use bus lanes in cities, as is the case in Norway, or avoid paying an urban congestion charge, as happens in London-have helped attract early adopters. But the benefits are unlikely to persist, once EVs become more than fringe machines.

So cost and range will determine the speed of the EV surge. In the US, the received wisdom is that consumers won't buy EVs en masse until the cars go further than 200 miles on a single charge (even though most trips involve much shorter distances than that).

As a proxy for demand-side tech in general, EVs should make oil firms think hard as they make longer-term investment plans. Uncertain forecasts should not mean complacency

That's a useful target for manufacturers-but only some are nearing it. Tesla's latest vehicles, the Model X and Model S, both run past the 200-mile threshold and, predictably, are more popular than their predecessors. General Motors (maker of the Chevy Volt), Nissan (maker of the Leaf) and China's BYD are likely to be next to breach the milestone.

But Tesla's vehicles still cost a packet. The Model X comes in at around $80,000 (but gets some tax breaks); the S is slightly cheaper. Both are way too expensive to take over the highway. Model Ts they aren't.

So bringing down the price-tag is the next task. Some are hopeful. "The decreased cost of batteries and their associated components are beating all expectations at the moment," says Roland Irle, co-founder of EV Volumes, a database for the emerging EV sector. He says those costs have fallen by around 15-20% over the past four years, and predicts unit costs for batteries could drop by another 60% by 2020.

That would translate into a fall of roughly a quarter in the cost of a car, assuming a battery accounts for about 40% of the overall price and that the output-and thus range-matches today's models. In practice, manufacturers may initially choose not to cut the price and instead upgrade the batteries to more powerful and advanced offerings, giving the longer range and faster recharging times buyers are looking for. Firms such as Tesla will probably work out ways to string more battery cells together. Other marques, such as Mercedes, are trying to make higher-density batteries that can produce more power from a single cell.

In short, the sector is in flux and no one quite knows what kind of EVs will come to rule the segment. But, again, oil producers shouldn't feel too relaxed about these developments deep in the weeds of consumer behaviour. The threat to oil demand comes not just directly from EVs-and their unknown capacity, one day, to replace ICE cars-but from the broader trend towards fuel efficiency they represent. The more EVs enter at the margins, the more manufacturers of ICE vehicles will eke out further distances from less fuel, by adding hybrid offerings or just making their engines less thirsty. Government policy-pretty much across the board-is going the same way.

"Overall, the tough fuel efficiency targets in Europe and the US are having more impact on oil demand than EVs so far," says Iain Mowat, an oil-demand analyst at Wood Mackenzie.

Even if change does come faster than the oil industry thinks, the fleet of old twentieth century ICE beasts won't disappear quickly. The average ICE car lasts 12-15 years, so new vehicles being sold now could be burning and emitting their way around our roads well into the late 2020s. And for all their fine words, only a handful of countries look set to meet their self-imposed EV-uptake targets this decade, notably China and Norway.